Analysis of Section 54F of Income Tax Act

We all know that on selling or transferring Capital Assets either long term or Short term, capital gains arise which are taxable in the hands of the taxpayer. 

Let’s understand with the help of an example

Mr Jorden purchased Jewellery for Rs. 50 Lakh in July 2012. The full value of consideration in the financial year of 2018-2019 stood at Rs. 1.8 Crore. The said Jewellery was held for over 36 months and was, therefore, deemed as a long-term capital asset.

If Mr Jorden does not invest the Capital gains then he is liable to pay Capital Gains Tax on INR 90 Lacs

He can save entire capital gains or substantial capital gains by investing in Section 54F of Income Tax. 

Let us Understand Section 54F of Income Tax

Section 54F of the Income Tax Act provides an exemption for capital gain in case of transfer of long term capital assets other than residential house property against investment in a residential house. 

The salient features for availing exemption under section 54F are detailed hereunder –

• The exemption under section 54F is available only to individual and HUF;
• The capital gain should have arisen on account of transfer of any long term capital assets other than a residential house;
• Net consideration has been re-invested should be purchased either 1 year before sale or 2 years after the date of sale or transfer and In case of construction of house property within 3 years of the date of transfer or sale
• The house property should be in India

A taxpayer can claim this Capital Gains Exemption while filing ITR in that particular financial year. The taxpayer needs to file ITR-2. And 31st July of the next financial year is the due date to file ITR. However, for FY 19-20 the due date to file ITR is 30th November 2020.

Maximum Exemption Limit

Exemption under Section 54F will be lower of:

• Exemption = Cost of new asset x Capital Gains / Net Consideration
• Maximum Exemption is up to Capital Gains.

Exemption under section 54F = Long term capital gain x Amount re-invested / Net consideration

Let’s Revisit the example

Mr Jorden purchased Jewellery for Rs. 50 Lakh in July 2012. The full value of consideration in the financial year of 2018-2019 stood at Rs. 1.8 Crore. The said Jewellery was held for over 36 months and was, therefore, deemed as a long-term capital asset.

Mr. Jorden invest sale proceeds to purchase Bungalow amounting 80,00,000

What Happens to Exemption if New House Property is Sold?

The lock-in period of 3 years is applicable when exemption u/s 54F of the income tax act is claimed. And the following situations can arise:

Situation 1:

When a new house is sold within 3 years

Consequences: The exemption u/s 54F is withdrawn. And the amount of exemption availed will be reduced from the cost of the asset. 

Situation 2:

When a new house is sold after 3 years from the date of purchase/construction.

Consequences: The exemption u/s 54F is not withdrawn

FAQ’s

Can NRI Claim exemption u/s 54F?

Yes, Provided the house property purchased is situated in India.